The Democrats' Possible $2 Trillion Tax Increase

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It looks like House Democrats are aiming to fulfill their promise to restore pay-as-you-go–or pay-go–budget rules in the new Congress. On Friday, the House will vote on a provision (PDF) that would not allow consideration of any bill that increase the deficit via new entitlement programs or tax cuts. Such a step would "represent a significant step toward a return of fiscal responsibility," according to the liberal Center on Budget and Policy Priorities.

The Dems' version of pay-go would also be another step toward killing the 2001 and 2003 Bush tax cuts, due to expire in 2010. The rules "would render it much more difficult to extend those tax cuts because it would require that they be fully offset through other tax increases or spending cuts," says budget analyst Brian Riedl of the conservative Heritage Foundation. Repealing the Bush tax cuts would, in effect, be a roughly $200 billion tax increase starting in 2011. So over 10 years, the period over which the costs of these things are usually calculated, elimination of the tax cuts means a $2 trillion tax increase–assuming no effect on economic growth. The repeal might make budget hawks happy but maybe not families who would see a $500-a-kid cut in their child tax credit or investors who would face higher capital gains taxes. For his part, Riedl would like to see a much tougher pay-go system and have it enshrined into statute. His ideal pay-go would:

— be a law, not just a "porous" congressional rule;

— apply to so-called emergency spending;

— apply to existing entitlement spending, not just new programs.